FSB Recommends Policy Changes to Address Risk in Asset Management

The FSB recently proposed policy recommendations designed to address systemic risks to the financial system posed by the asset management industry. The document acknowledges that the asset management industry poses vastly different structural issues than banks and insurance companies due to the agency nature of asset management. Nonetheless, the FSB identifies four particular vulnerabilities of asset management: liquidity mismatch in open end funds; leverage; certain operational risks; and securities lending. In particular, the FSB encourages a focus on liquidity and leverage because those areas represent “key vulnerabilities” to the financial system.

While the FSB finds that a number of policy measures and tools currently exist to address liquidity transformation and first mover advantage in open-end funds, it finds that vulnerabilities remain. To address these unmitigated risks, the FSB’s recommendations attempt to address: a lack of information and transparency; gaps in liquidity risk management tools; and the adequacy of available liquidity management tools in extraordinary circumstances.

The FSB also identifies a number of unmitigated risks in the use of leverage in the asset management industry. Specifically, the FSB is concerned about a lack of consistent and accessible data on leverage as well as variations in the limits on financial and synthetic leverage across jurisdictions, and recommends policy changes to mitigate these risks.